The relentless climb of the U.S. stock market to record highs has prompted investors to reassess their portfolios, considering international markets for potential outsize returns. The S&P 500, leading regional indexes with a 24% gain in 2023, continues to outpace rivals in 2024, accentuating its decade-long outperformance.
However, the widening valuation gap between the S&P 500 and MSCI’s index of stocks from over 40 other countries, nearing a two-decade high, has intrigued investors looking for opportunities abroad. The S&P 500’s heavy weighting in technology companies continues to attract investors betting on emerging fields like artificial intelligence.
While the U.S. boasts better economic and earnings prospects for 2024, the high valuation of the S&P 500, trading at nearly 20 times forward earnings estimates, has led some investors to explore undervalued opportunities in global equities. The MSCI’s all-country world index, excluding the U.S., is trading at 12.8 times, close to its widest gap with the S&P 500 in over two decades.
International equity funds received $73.6 billion in net inflows in 2023, while U.S. equity funds experienced $52.1 billion in net outflows. Vanguard’s economic models project average annual U.S. equity returns of 4.2% to 6.2% over the next decade, contrasting with projections of 7% to 9% for non-U.S. developed markets and 6.6% to 8.6% for emerging markets.
Japan’s Nikkei, already up 8% in 2024 at 34-year highs, is drawing attention from investors, with LPL Financial recommending an “overweight” position in Japanese equities due to still-attractive valuations and improving technical factors. However, the firm maintains an “underweight” stance on Europe.
Hans Olsen, CIO for Fiduciary Trust Company, acknowledges the U.S. stock market’s reasonable valuations when tech and growth shares are excluded. He said, “If you have an economy that is actually a bit stronger than people are giving it credit for … that should flow through to the earnings.” He remains confident in a strong U.S. economy translating into robust corporate profits, potentially allowing U.S. stocks to outperform international markets in 2024.
As investors weigh the potential for global market opportunities, the coming months may see a reevaluation of portfolios to balance the U.S. market’s historical strength.
